Analysis

This is a current relative analysis on Datalink and related companies. It focuses on growth, profitability and valuation. The first two will help me understand the position of DTLK in terms of business and the third will assess the market value in relation to its peers.

Growth

Historical growth vs Expected growth

So, over the last two years Datalink has been reporting an astonishing growth in revenues, beating every other company in the sample. CAGR (2010-2011) was 46% against 17% on average. VMW (VMware), NTAP (Network Applications), EMC and ORCL (Oracle) were the next with the highest historical growth in revenues. Note that these are typical storage or software providers.

Average forecasted revenue growth next year is around 4% compared to 12% for Datalink, which is only exceeded by VMW (>20%). EMC is next with 10% showing EMC is conquering market share in the storage market and that this will benefit from new developments like clouding transition and “big data” (see Industry Research).

DELL and HPQ are expected to be the worst performers concerning to growth as the hardware market is facing restrictions in terms of customers’ IT budget and declining prices.

Profitability

Regarding industry profitability, data shows little surprise. Hardware manufacturers report the lowest margins and software providers report the highest. There are some exceptions like VMW and CSCO (Cisco). VMW has the highest margins and its business is storage related. CSCO has a high profitability and is labeled more as a hardware manufacturer. This last situation might come from the fact that CSCO provides a more specific hardware related networks, like servers.

About DTLK, profitability is relatively low. This reflects the fact that the company is a reseller of the other companies’ products like VMW, EMC, NTAP, ORCL and CSCO. Of course the company also has a service business that has a higher margin, but it still accounts for only 35% of total revenue. This is probably why the company is widening the range of services offered (see Strategy).

The expected evolution of margins suggests that DTLK will still have a mainly-hardware exposure. Nevertheless company’s efforts are contrarian to this trend as latest acquisitions indicate (see Acquisitions).

Valuation

DTLK seems to be relatively undervalued in relation to expected earnings, book value, sales, cash, EBIT and growth. Mixing this analysis with the previous about growth and profitability I would say that HPQ and DELL are incorporating the bad performance in terms of expected revenue growth, the same way as VMW is with the opposite situation. All the other software and storage players are priced with little differences except BRCD (Brocade Communications) that looks a little undervalued.

If we exclude IBM’s exceptional debt, it’s possible to see that hardware manufacturers present a higher level of debt, then follows the software players and storage is the last. DTLK is the only in the sample with no debt in balance as of 2011.

In terms of upside potential based on consensus price target, DTLK is the most undervalued company (>50%), followed by hardware players HPQ and DELL. And surprisingly expensive (in PER terms) VMW presents almost 30% upside potential.